There are many circumstances which may lead to an overpayment of wages. Employees find themselves in a position where they are often confused about what happens when there is an overpayment of wages and what their employers can or cannot do.
What is an overpayment?
To start with it is useful to know what constitutes an overpayment. This is essentially a payment which you receive that you are not entitled to at the time it is made. For example, where a payroll or administrative error has resulted in you receiving more than your monthly wage.
What are wages?
Wages include the remuneration for the work you carry out in accordance with your employment, bonuses, commission, holiday pay. Statutory payments such as maternity pay and sick pay are also considered as wages. Loans and redundancy pay are examples of payments that do not constitute wages.
Clauses in your contract of employment
Your contract of employment may include an expressed provision whereby you agree for your employer to make deductions from your wages to recover an overpayment if you are still an employee. If your contract permits your employer to recover the overpayment, then your employer will be able to rely on this.
If there is no provision in your contract which allows your employer to recover the overpayment, then any attempt by your employer to recover the sum will be in breach of contract unless they are seeking to recover overpaid wages by deducting it from future wages. This is discussed in further detail below.
Defence to an employer’s claim for recovery
You may be able to argue that you have a defence if your employer seeks to recover the overpayment. The defence is made on the basis that you have changed your position, become reliant on the money and spent it and that it would be unfair to require you to repay the sum.
There are three conditions that must be satisfied for the defence to be applicable:-
- You employer has made a statement of fact which made you believe that the money was your own;
- You acted in good faith and without knowledge of any claim for recovery from your employer and as a result, changed your position in terms of the money; and
- You were not involved in the cause of the overpayment.
There are other factors that are taken into consideration when determining whether the defence applies. For example, the size of the overpayment and your financial position to repay.
Unlawful deduction from wages
The Employment Rights Act sets out that it is unlawful for an employer to make a deduction from an employee’s wages unless the deduction is authorised by law, there is a provision in the contract (as mentioned above) or the employee has provided written consent.
Going one step further, employers have an additional benefit in that they are exempt from this rule where the deduction from wages is for the purpose of reclaiming an overpayment of wages or expenses. The exception applies regardless of the reason why the employer has made the overpayment. So, for example, if there was an honest mistake on the part of the employer or an employee made false claims of expenses, this can be recovered through deduction from future wages.
The purpose of the deduction from the employee must be to recover the overpayment and no other reason.
What to do if your employer notifies you of an overpayment
If it comes to your employer’s attention that you have been overpaid and they have informed you that they wish to seek reimbursement from you, we suggest that the best steps for you would be to discuss and agree a repayment plan with your employer taking into consideration the amount of overpayment.
Being honest and transparent with your employer about what would be a feasible amount to be deducted from your wages to reimburse the overpayment is more likely to result in an agreement from them and avoid a breakdown in your employment relationship. They may even, in particular circumstances, agree to write off some of the overpayment, this is of course, subject to agreement.
If you find that your employer acts unreasonably when recovering the money, there may be a breach by them of their implied duty of trust and confidence to you which may lead you leave and claim constructive unfair dismissal. This is dependent on your particular facts and it is best to seek some advice as soon as possible before making a decision to resign.
In brief, if you have been overpaid wages and your employer notifies you of this and you are still an employee, your employer will be able to recoup the overpayment from you by deducting this from your future wages. Your employer should act reasonably when doing this and you should try and agree a repayment plan so that there is no financial hardship to you as a result of the deductions and to avoid a breakdown in your relationship.